The False Claims Act case against Lance Armstrong lasted longer than his 7 year Tour de France win streak.

While the settlement of the False Claims Act case against Lance Armstrong has generated a press release, a quick online search didn’t produce a copy of the actual agreement. So I filed a Freedom of Information Act request and the next day the Department of Justice provided me a copy of the Lance Armstrong settlement agreement.  Thank you, Team DOJ!  Below is my take on that agreement and what it tells us about the case.

The settlement amount

The settlement agreement provides that Lance Armstrong will pay $5 million to the Government and $1.65 million to the relator Floyd Landis. To put this in context, the Postal Service had paid about $40 million to sponsor Team Postal. Trebling that amount, and throwing in civil penalties and investigative costs, bumps up potential damages to well over $100 million. The settlement amount was thus less than 7 cents on the dollar.

Damages was always the Government’s weakness – because there weren’t any. This should have been apparent at the outset from the contemporaneous USPS reports on how much publicity and new revenue the Team Postal sponsorship had generated. These reports were poppycock, of course, but they still posed insurmountable problems for the Government’s case.

The USPS-generated reports on the value of the Team Postal sponsorship came in response to criticism over the deal. The Postal Service is often wrongly criticized for anything it spends on advertising. In my view, it should be spending a lot more, especially to defend the remains of First Class Mail. But these critics had a point. Why spend tens of millions of dollars on an event that takes place on foreign soil, and that most Americans have never seen and don’t care about?  And how will promoting the U.S. Postal Service in foreign countries generate more U.S. Mail?

To counter these criticisms, USPS needed to show that the six-year agreement made economic sense, so it generated report after report calculating the value it received.  Armstrong’s attorneys say these reports show USPS earned over $163 million in quantifiable benefits from the sponsorship – more than four times what USPS spent on it. These reports were backed by statements from high level USPS officials attesting to the great deal it had made. Armstrong’s summary judgment motion cited some of these beauties, including:

  • “I can assure you that the value of the brand advertising we receive from the USPS Pro-Cycling Team more than offsets the cost of the sponsorship.”
  • “The sponsorship has provided a substantial return-on-investment and has been a real bargain.”
  • “While postal officials decline to say how much they pay, spokesman Joyce Carrier said the free advertising they received ‘is way more than we ever spent’ to sponsor it. ‘Anyone who was looking at it on a return from investment, and everybody does . . . they think it’s pretty darn good.’”

How could the Government get past all of these contemporaneous statements from top USPS officials on the tremendous value USPS obtained from the sponsorship contract? And while Lance Armstrong later admitted to rampant doping during the Team Postal years, how did this revelation negate all of these previous economic benefits?

Yes, Lance Armstrong violated the no-doping clause of the USPS sponsorship agreement. But Armstrong somewhat successfully concealed the truth for a long time, thus allowing the Postal Service to get the benefit of the bargain.  If Armstrong had admitted to doping when the contract was in effect, maybe there would have been some damages, but his success at hiding the truth prevented that from happening. While that may be hard to swallow, the False Claims Act was not designed to mete out just desserts for all bad acts related to a government contract.

The round dollar figure

Next, let’s analyze the nice round $5,000,000 settlement figure itself. Having represented clients in various Government fraud investigations, most involving the Postal Service, I can tell you that the Government’s standard opening position is that it will only settle at twice the amount of actual damages. The Government prefers talking about damages, not entitlement, and its settlement offer is normally some specific dollar amount, multiplied by two.

The perfectly round number of the $5 million settlement shows it was not arrived at by an attempt to measure actual damages and multiplying by two. It is a number based on perceived litigation risk by both sides. From the Government’s side, the question was how much it could get from Armstrong without going to trial. Given its weakness on damages, the Government was staring at the possibility of getting only statutory penalties, which didn’t amount to much and would not have justified its pursuit of the case. From Armstrong’s side, the question was how much was finality worth?  Even though the Government was unlikely to recover significant damages, there is no telling what a jury would do.  Moreover, statutory penalties were likely, and an appeal would be required if the damages issue went the wrong way. Armstrong was looking at the possibility of spending millions more on professional fees with no assurance he would prevail.

The $1.65 million settlement with the Relator tells a different story. In context, this amount is not a perfectly round number – one hardly picks $1.65 million out of thin air. Instead, it is an approximation or discount on Relator’s attorney fees and expenses, likely based on actual numbers that were presented to Armstrong.

The payment terms

Typically, when the settlement amount is in this range and the defendant can afford it, the Government demands full or substantial payment upon agreement or soon afterwards, often within 10 days of signing. The settlement’s payment terms are lenient. Armstrong’s first payment was due 30 days after signing and was only $75,000; his second payment, due in 90 days, was $677,000. Armstrong then had 180 days to make the next payment of $1,879,000. No further payment was due until one year after signing, when Armstrong owed a balloon payment of $2,368,000. Nice payment terms, if you can get them.

Armstrong had similarly leisurely terms to pay the Relator. The first payment was due in 30 days and was only $25,000. The next payments were $223,000 in 90 days; $620,000 in 180 days; and the final $782,000 within one year.   [Rounded payment numbers used above.]

The settlement agreement’s layaway plan thus gives Armstrong plenty of time to sell “the Texas Collateral,” the proceeds of which he presumably intends to use to pay the settlement. Armstrong granted the Government and the Relator a lien on that property until it is sold. He also signed a Consent Judgment decree that can be filed against him should he default on his payment obligations.

Relator’s share

Now let’s look at the Relator’s share of the Government’s $5 million bounty. Since the Government intervened in the case, the Relator’s share could have been anywhere between 15 and 25 percent. The settlement agreement grants Relator a 22 percent share, which works out to $1.1 million. The Department of Justice has taken the positon that a 15 percent share is appropriate for a case that settled early (before trial or discovery) and a 25 percent share is reserved for fully litigated cases in which the relator’s contribution is substantial. All things considered, 22 percent was a healthy reward for the Relator in this case. One wonders whether the Government would have sought a lower Relator’s share if the recovery from Armstrong had been greater.

FCA claims with no real damages

I’ve been practicing long enough to remember when False Claims Act cases involved actual falsehoods, like doctored invoices and fake signatures. Rare is the case today where the Government alleges an affirmative falsehood by the contractor. Instead, modern day FCA cases involving government contracts are normally about a contract interpretation or breach of contract. Not only are these cases really contract disputes at heart, but in many of them, the contractor’s position is the most reasonable one. Evolving FCA standards have resulted in the fraudification of contract disputes.

The Armstrong case goes one step beyond fraudification to cases where the Government is not even monetarily harmed by the defendant’s bad actions.  There have been other FCA cases where the Government has suffered no or minimal damages from an alleged false claim. For example, in U.S. ex rel. Wall v. Circle C Constr., LLC, 813 F.3d 616 (6th Cir. 2016), the Government sought $1.6 million (after trebling) for a relatively minor violation of the Davis Bacon Act.  The Court found that the Government’s actual damages were only $9,900 and later held that the Government must pay the defendant’s attorney fees under 28 U.S.C. § 2412(d)(1)(D) because the Government’s demands were excessive.

With the teachings of the Circle C case, and the settlement of the Armstrong case after a 10 year slog, let’s hope the Government will be more reluctant to intervene in – and maybe even move to dismiss – future qui tam FCA cases where there are no real damages.

The standard form construction contract documents published by the American Institute of Architects are used widely throughout the construction industry. With assistance from federal agencies, the AIA created specific construction contract documents, such as the B-108-2009, to address the unique nature of federally-funded and insured projects. This year the AIA issued its once-a-decade revisions to address changes and trends in the industry. While the 2017 revisions d0 not materially alter the documents specifically tailored to federal projects, some of the changes will affect documents regularly used by federal contractors. They included changes in the insurance and indemnification clauses, addition of new limits on contractor claims, and new language addressing the treatment of retainage and the assessment of liquidated damages.

Husch Blackwell’s Brent Meyer prepared this overview of the noteworthy changes in the 2017 edition of the AIA contracts for Law 360.

 

Further reading—

7 Major Revisions To Standard Form Construction Contracts (Dec. 4, 2017)

Good faith and fair dealing puts an end to the “gotcha” in submittal review (June 26, 2017)

The Davis-Bacon Act does not apply to P3 projects (April 7, 2016)

In Joe Tex’s song about unrequited love, the Southern Soul singer belts out, “I gotcha, never shoulda promised to me.” Joe Tex may have thought this approach is the right one for romantic disappointment, but parties to a contract have a different set of obligations.

A lawsuit by Washington State contractor Nova Contracting should serve as an alert to owners dealing with the assessment of a contractor’s performance. Nova’s lawsuit came about because of the owner’s termination of the contract. Nova claimed the owner was using a “gotcha” review process for its submittals that was designed to prevent performance. The trial court agreed with the owner.

Culvert_with_a_dropNova appealed and the court of appeals found sufficient questions of fact to send the dispute back to the trial court. The opinion offers insight into fair dealing and good faith in the performance of construction contracts. Nova Contracting, Inc. v. City of Olympia, No. 48644-0-II (Wash Ct. App. Apr. 18, 2017). Continue Reading Good faith and fair dealing puts an end to the “gotcha” in submittal review

The U.S. Postal Service spends about $3 billion per year to move the mail by truck and does so under a special type of contract called a Highway Contract Route (HCR) contract. These contracts have unique contract clauses, and even their own lingo. For example, an HCR “amendment” is what the rest of the government contracting world would call a contract “modification.”

One of the biggest differences between HCR contracts and other government contracts is the Changes clause. Under an HCR contract, the contracting officer has limited ability to direct unilateral changes. The CO may only issue a unilateral change, called a “minor service change,” if the price impact would be $5,000 or less. Under a Contract Delivery Service (CDS) contract – a subset of HCR contracts for mailbox deliveries – unilateral changes must be $2,500 or less. Even for these changes, a contractor who disagrees with the CO’s determination may file a claim for additional compensation.

In addition to these monetary thresholds, unilateral changes are further restricted to certain types of changes. The only unilateral changes a CO can direct are an extension, a curtailment, a change in line of travel, a revision of route, and an increase or decrease in frequency of service or number of trips. The CO has no authority to unilaterally direct any other change, even if the price impact would be $5,000 or less. For example, the contracting officer may not unilaterally direct a contractor to change equipment or buy new equipment. Continue Reading The unique Changes clause in Postal Service HCR contracts

Every government contract contains implied duties, such as the duty to cooperate and the duty of good faith and fair dealing. Such implied duties generally prohibit one party from interfering with the other’s performance or taking actions that undermine the other’s expected benefit of the bargain.

Implied duties offer important protections when an issue is not clearly addressed in the text of the agreement. But courts have been reluctant to apply them in a way that overrides express contract language. A party generally does not breach the duty of good faith and fair dealing, for example, simply by exercising a right that is expressly provided in the contract.

But the government does not have carte blanche. Even if there is express language that gives the government a certain right, the government cannot exercise that right unreasonably or in a way that interferes with the contractor’s performance. In Agility Public Warehousing Company KSCP v. Mattis, No. 2016-1265 (Fed. Cir. Apr. 4, 2017), for example, the Federal Circuit explained that the government can breach the duty of good faith and fair dealing even if its conduct is otherwise consistent with the express terms of a contract.

Airmen serve dinner in the field in a mobile kitchen trailer during Global Medic 13 on Fort McCoy, Wis., July 16, 2013. The food service specialists are assigned to the 940th Force Support Squadron, Beale Air Force Base, Calif.
Source: DOD Image Library

Continue Reading Can the government contract around the duty of good faith and fair dealing?

Similar to a Termination for Convenience clause, a Termination with Notice clause (often found in U.S. Postal Service contracts) allows a party to end a contract without breaching it. Under the clause, either party may terminate the contract without cost consequences by providing advance written notice – usually 60 days – to the other party. The Postal Service Board of Contract Appeals (PSBCA) addressed the limits that apply to the exercise of this clause in a decision on two closely related cases. Cook Mail Carriers, Inc., PSBCA No. 6583, and Patricia Joy Sasnett, PSBCA No. 6584, issued on March 24, 2017.

Cook and Sasnett each had separate Highway Contract Route contracts to transport mail at designated times between various points in Alabama. In March 2014, the Postal Service made changes to its processing network that affected several contractors, including Cook and Sasnett. While the network changes could have been effected by modifying their contracts, the Contracting Officer (CO) instead exercised the Termination with Notice clause.

When he terminated the contracts, the CO misunderstood the network changes.  He thought the changes were needed because the Gadsden, AL mail processing facility was closing.  In fact, the Gadsden facility was already closed and revised routes were needed because other mail transportation hubs were being relocated.

Propriety of the termination

Cook and Sasnett filed claims asserting the terminations were improper and the case ended up at the Postal Service Board of Contract Appeals (PSBCA). Examining the Termination with Notice clause, the PSBCA noted that while it does not include any express limitations, its use “is not truly unlimited.”  The PSBCA then considered whether the CO’s action was proper under three separate legal principles. Continue Reading Three legal principles that limit the Termination with Notice clause

The Missouri Court of Appeals decision in Penzel Constr. Co. v. Jackson R-2 School District, No. ED103878 (Mo. Ct. App. Feb. 14, 2017), is an important development for public construction contracting in Missouri. The decision adopts the Spearin Doctrine and approves the use of the Modified Total Cost method for proving damages. While these concepts have been used widely in federal construction contracting, the Penzel decision is the first published decision recognizing them in Missouri.

The Penzel case involved additions to a public high school. The School District hired an architect. The architect retained an electrical engineering sub-consultant. When the project went to bid, the School District furnished bidders with the architect’s plans and specifications. Penzel Construction Company submitted a bid as the general contractor.

Penzel’s electrical subcontractor was Total Electric. Total’s bid was $1,040,444. Neither Penzel nor Total “noticed” any errors, omissions, or other problems with the plans and specifications during the bidding process.

Total encountered delays totaling 16 months, which Total attributed to “defects and inadequacies” in the electrical design. Under a liquidating agreement between Penzel and Total, Penzel sued the District. Penzel alleged that the District impliedly warranted the design. Penzel claimed the design was not adequate for completing the project.

In addition to proving liability, Penzel needed to prove the damages associated with its loss of productivity claim. To do so, Penzel sought to use the Modified Total Cost Method. The claimed damages were comprised of additional project management and supervision costs, wage escalation, unpaid change order work, and consultant’s fees. Continue Reading The Spearin Doctrine and Modified Total Cost claims on Missouri public projects

Contract Disputes Act claims are subject to a six-year statute of limitations. While the math involved in calculating when that limitations glass-time-watch-businessperiod runs seems easy, determining when a CDA claim accrued is not always so simple. FAR 33.201 defines “accrual of a claim” as the date when the party with the claim knew or should have known all of the events that “fix the alleged liability” of the other party. But the Federal Circuit’s decision in Kellogg Brown & Root Services, Inc. v. Murphy, No. 2015-1148 (Fed. Cir. May 18, 2016) [PDF], shows that the date of accrual is not always clear.

Continue Reading Accrual of contractor claims after KBR v. Murphy

Leslie Arkansas Post Office
The termination of a $34,000 mail delivery contract serving this post office in Leslie, AR could result in three standard clauses being declared unlawful on thousands of USPS transportation contracts.

Three standard clauses used in virtually all Postal Service surface transportation contracts are now on the chopping block. In an interim ruling, the Court of Federal Claims ordered the Postal Service to show why these three clauses should not be declared unlawful and unenforceable. Tabetha Jennings v. U.S., Fed. Cl. No. 14-132C, May 29, 2016.

The case involves the default termination of a $34,000 contract to provide mail delivery between Leslie and Timbo, Arkansas. Tabetha Jennings, the sole proprietor contractor, had provided service for seven years without any issues. Then, during a heavy volume Christmas season, a postmaster accused her of using a vehicle with insufficient capacity. The postmaster was wrong, but this charge led to other accusations. Eventually, the postmaster accused Jennings of conducting herself “in an unprofessional manner” and disrupting mail processing operations. These accusations, in turn, led the contracting officer to rescind Jennings’s security clearance and her access to postal premises and the mail.

Jennings disputed the accusations against her and presented statements from a different postmaster and from another contractor that backed her up. But the contracting officer was unmoved and did not lift the suspension of her security clearance. When Jennings failed to provide a substitute carrier to continue the service she had been barred from performing herself, the contracting officer terminated her contract for default. Continue Reading Court orders Postal Service to justify lawfulness of three standard clauses

An agency must use-it or lose-it under a fixed-priced contract.  When an agency makes it impossible to receive a contractor’s service under a fixed-priced contract, it must still pay the full contract price. So long as the contractor is willing to live up to its end of the bargain, the contractor is entitled to payment regardless of whether it provided any service. And the agency’s failure to tender work does not itself serve as a constructive termination, so the contract remains in effect until actually terminated.

Those are the lessons of Olbeter Enterprises, Inc., PSBCA No. 6543, January 12, 2016, involving a point-to-point mail transportation contract. During the course of the contract, the Postal Service closed one of its facilities, making it impossible for Olbeter to provide the contracted service. The Postal Service, however, did not issue a termination notice or contract modification. Instead, it allowed the contract to remain in force and continued to make full payment, occasionally ordering other work for which Olbeter was paid separately.

Nine months after the facility closure, the parties agreed to a convenience termination. Later, the Postal Service decided that the payments it had made during the nine-month closure period were over-payments. The Postal Service recovered those amounts by withholding payments under a different contract. Olbeter appealed the withholdings to the Postal Service Board of Contract Appeals.

At the PSBCA, the Postal Service contended that Olbeter knew the facility had been closed, that this made performance impossible, and that the Postal Service intended to terminate the contract. The Postal Service thus argued that the facility closure itself served to constructively terminate the contract. The Board disagreed. Whatever the Postal Service’s intentions may have been, and regardless of Olbeter’s knowledge of those intentions, the agency had not taken action to terminate the contract. In addition, the parties had agreed to a termination nine months after the facility closed and the Board would not supplant that agreement with a constructive retroactive termination.

The Postal Service next contended that it had breached the contract itself by not tendering any mail. Since it had breached the contract, the Postal Service argued, Olbeter was limited to recovering its expectancy damages, which were much less than nine months of payments. The Board rejected this argument, holding that the agency’s failure to tender mail was not a breach.

Finally, the Postal Service contended that allowing Olbeter to retain nine months of payments for service it did not perform would unjustly enrich Olbeter or constitute a windfall. The Board denied this argument as well, noting that unjust enrichment is an equitable doctrine that applies when parties do not have an express contract, and here an express contract existed. That contract simply did not provide the Postal Service a mechanism to withhold payment for service that the agency had made impossible to perform.  Olbeter was thus entitled to retain the payments it had received for the nine-month closure period.

The principle underlying the Olbeter decision would apply equally to any fixed-priced contract where the government made performance impossible or waived its right to receive performance. If the contract does not have a clause that directly addresses such events, and if no contemporaneous action is taken to terminate it, the agency remains obligated to pay the full contract price.